IT companies margins swell on greenback fever

IT companies margins swell on greenback fever
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IT companies margins swell on greenback fever

Highlights

Planned wage hikes, rising utility costs may eat into revenues

Bengaluru: Strengthening of US dollar against the rupee from the beginning of this year is likely to benefit the operating margins of domestic IT services firms in the coming quarters. However, scheduled wage hikes, more travel cost and higher utility cost due to gradual opening of offices may eat into the benefits arising out of margin improvement.

Indian IT firms have seen improvement in their margins for the third quarter ended December 2020 owing to less travel and utility costs apart from deferring expenses on account of salary hike, bonuses, and other staff-related costs.

These cost benefits continue in the fourth quarter as most IT firms continue to operate with minimal staff capacity. Moreover, the weakening of rupee against dollar in the January-March quarter is expected to supplement the margin profile further.

Due to rising US bond yields, dollar has strengthened against all emerging currencies including rupee this month. On Tuesday, the Indian unit fell 1.2 per cent to close at 73.38 against the US dollar. The fall was the steepest one-day drop since February 26, making it the weakest in a month.

Analysts said that if the US bond yield rises further, rupee is expected to depreciate from these levels. In such a scenario, IT firms will gain from higher USD/Rs conversion rate.

"In the fourth quarter, rupee has not moved much against US dollar. In Q3, the conversion rate was around 73.5 level which has not changed much in January-March quarter. However, if US bond yield continues to rise, the Indian rupee will depreciate from these levels, which should support the margins," said a Mumbai-based analyst.

"However, all IT companies are now planning wage hikes. Also, travel and utility costs will rise as the situation normalises. So, the gain in operating margins will be utilised to meet these rising expenses," he added. In Q3 of ongoing fiscal, most IT firms have seen improvement in their margins. Infosys posted an operating margin of 25.4 per cent, which were 350 basis points higher than the corresponding period of last fiscal. It has also revised its margin guidance for FY21 to 24-24.5 percent from 23-24 per cent.

Similarly, market leader Tata Consultancy Services witnessed its operating margins growing by 160 basis points year-on-year basis to 26.6 per cent in Q3. Third largest IT services firm HCL Technologies improved its operating margin by 265 basis points to 22.9 percent on YoY basis in the December quarter. It also raised its margin guidance for FY21 to 21-21.5 percent from 20-21 percent as predicted earlier. Analysts say that the margin guidance for FY22 is not likely to see any drastic change from this fiscal despite a likelihood of weaker rupee.

"In the next financial year, things are expected to come back to normal level. This will push up cost in terms of wage hike, utility and travel costs among others. So, guidance is likely to be at par with this fiscal level," said the analyst.

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